HSA in S Corp

[oceanlovin'ea]

Client wants to set up HSA this year. He is 62 and has high deductible plan so he qualifies. The s corp has been paying his health insurance already. It is added to W-2 wages and then backed out as adjustment on personal return.

My question would be about contributions to the HSA. According to the example in the Tax Book, the S corp can also make the contributions to the HSA. It would also be included in his W-2 wages. Would it also be backed out as an adjustment to income? According to the table on pag 13-1 of Tax Book, the maximum he can contribute is $4250 in 2013. So the company could put $4250 in his HSA account and it is an expense to the s corp just like the health insurance.

Is this correct? Am I missing anything?

Oh, he banks with Wells Fargo. He went in the bank and they said that they don't handle HSA accounts but they would put him in contact with someone who did. Does that make sense? It seems like a huge bank like that would handle HSAs but maybe they just meant in their branch they did not do that but another department of the bank does.

Linda, EA

[oceanlovin'ea]

pub 15b

Ok. I was reading in pub 15b on pg. 16 regarding HSAs. Here is a quote:

Partnerships and S corporations. Partners and 2% shareholders of an S corporation are not eligible for salary reduction (Pre-tax) contributions to an HSA. Employer contributions to the HSA of a bona fide partner or 2% shareholder are treated as distributions or guaranteed payments as determined by the facts and circumstances.

According to that it would be better for him to make his own contributions to the HSA. It would be an adjustment to income on his personal return.

So we should just leave the s corp out of the HSA equation. The S corp can continue to pay his health insurance premiums as we have been doing.

Now am I correct in this conclusion?

I am having a foggy brain day. Sorry.

Linda, EA

[GTS1101]

HSA in S-corp

It is done the same way as the health insurance. The S-corp makes the contribution for the owner/employee and then takes the deduction. It is added to the owner's W-2 just as the health insurance is and backed out as an adjustment on 1040 on the line for HSA contributions. It is not the same as a salary reduction pre-tax contribution.

[appelman]

What would be the advantage?

Why involve the S-Corp at all. since he can make a fully deductible personal contribution?

[Burke]

Because if the SCorp makes it, it goes in Box 1 of his W-2, but NOT Box 3 & 5. Not subj to Soc Sec. And he can deduct on his return like regular health insurance. If they pay him a salary, and he makes the contribution directly, yes he gets to deduct it himself, but it is subj to FICA when he gets it from the business.

[appelman]

I still think it's a wash.

Option 1: He draws a 30K salary from the S-Corp. He makes a 4K HSA contribution and deducts it as an adjustment. He reports and pays FICA on 30K of wages, net income tax on 26K of wages after the adjustment.

Option 2: He draws a 30K salary from the S-Corp. The Corp. makes a 4K contribution to his HSA, deducts it as officer compensation, and sends him a W-2 with 34K in Box 1, 30K in Boxes 3 and 5. He reports 34K of wages, deducts 4K as an adjustment, and pays both net income tax and FICA on 30K of wages after the adjustment. The corp's 4K deduction will be reflected on his pass-through income or loss from the corp.

[DaveinTexas]

The additional salary

Option 1: He draws a 30K salary from the S-Corp. He makes a 4K HSA contribution and deducts it as an adjustment. He reports and pays FICA on 30K of wages, net income tax on 26K of wages after the adjustment.

Option 2: He draws a 30K salary from the S-Corp. The Corp. makes a 4K contribution to his HSA, deducts it as officer compensation, and sends him a W-2 with 34K in Box 1, 30K in Boxes 3 and 5. He reports 34K of wages, deducts 4K as an adjustment, and pays both net income tax and FICA on 30K of wages after the adjustment. The corp's 4K deduction will be reflected on his pass-through income or loss from the corp.

Could bolster his SEP IRA contribution, create a real deduction for the company, possibly create a flow through loss to the shareholders and justify a larger profit distribution. The IRS sees line 7, officer compensation, compares it to industry averages and compares that figure to profit distributions. I think the larger the amount on line 7 the better for an S Corp officer.

Just saying is all....

[mactoolsix]

Her is an IRS bulletin

concerning partnership and S-corp HSA contributions - be sure to read Q3

http://www.irs.gov/irb/2005-04_IRB/ar13.html

[oceanlovin'ea]

I've read this 3 times and it seems to me that paragraph 1 and 2 contradict each other. First paragraph says not able to deduct from income and paragraph 2 says shareholder/employee can deduct from income.

So which is it?

Linda, EA

[DaveinTexas]

From notice 2008-1

I've read this 3 times and it seems to me that paragraph 1 and 2 contradict each other. First paragraph says not able to deduct from income and paragraph 2 says shareholder/employee can deduct from income.

So which is it?

Linda, EA

This refers to the wages not being subject to FICA taxes, here's the quote from Notice 2008-1, "the premium payments are included in wages for income tax withholding purposes on the shareholder-employee's Form W-2, Wage and Tax Statement, but are not wages subject to Social Security and Medicare taxes if the requirements for exclusion under section 3121(a)(2)(B) are satisfied.

3121(a)(2)(B):

http://www.bradfordtaxinstitute.com/Endnotes/IRC_Section_3121a2B.pdf

I take this to read that the payments to the HSA are reported as wages to the employee but not subject to FICA or Medicare as long as the payments are funding the HSA or some type of medical insurance.

Anyone else read/interpret these passages differently?